Green Plains Partners LP: This 11.9% Yield Is No Joke
This Double-Digit Yielder Looks Interesting
In recent years, high-yield energy stocks didn’t really have the best reputation. Due to a downturn in commodity prices, many oil and gas companies had no choice but to slash their dividends.
And because investors who own high-yield stocks were mostly looking for income, dividend cuts weren’t exactly a welcome move. As a result, many high-yield energy stocks that reduced their dividends also saw substantial declines in their share prices.
Therefore, it shouldn’t come as a surprise that whenever an income investor sees a high-yield stock from the energy sector today, they might have some second thoughts before adding it to their dividend portfolio.
Still, not every high-dividend energy ticker is a potential yield trap.
Case in point: Green Plains Partners LP (NASDAQ:GPP) is a master limited partnership (MLP) headquartered in Omaha, Nebraska. It was founded in 2015 and completed its initial public offering (IPO) in the same year.
GPP stock was a high yielder from the start. In October 2015, the partnership declared its first-ever cash distribution, which was $0.40 per unit. Based on the price at which GPP stock was trading at that time, that quarterly distribution rate already gave the MLP a double-digit yield.
So, what do you think happened afterward?
Well, looking at GPP stock’s distribution history, we see that from its first distribution to May 2018, the partnership has raised its payout every single quarter, by a total of 18.75%. (Source: “Green Plains Partners LP Dividend Date & History,” Nasdaq, last accessed April 16, 2019.)
And while Green Plains Partners LP didn’t announce any more distribution hikes, management has maintained the quarterly payout at a very generous level of $0.475 per unit. Trading at $15.96 apiece at the time of this writing, that payout translates to an annual yield of 11.9%.
In other words, this MLP started as an ultra-high yielder, and its payout has been either steady or increasing since its inception. Moreover, based on where GPP stock is trading right now, investors purchasing the stock today can still lock in a yield above the double-digit mark.
Of course, as is the case with any security we profile here on Income Investors, for Green Plains Partners LP to be worth considering, it has to be able to generate enough financial resources to cover its payout.
With that in mind, let’s check out GPP stock’s financials.
Can Green Plains Partners LP Cover Its Payout?
Like most MLPs, Green Plains Partners reports something called distributable cash flow, which it calculates by taking adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and then deducting interest expense, income taxes, and maintenance capital expenditures.
To see whether the payout was safe in a given reporting period, all you need to do is take the partnership’s distributable cash flow and compare that number to the actual cash payout.
According to GPP’s latest earnings report, the partnership generated $13.1 million in distributable cash flow in the fourth quarter of 2018. It declared $11.3 million in actual cash distributions for the quarter.
Therefore, the partnership achieved a distribution coverage ratio of 1.16 times, meaning it generated 16% more cash than what was needed to meet its distribution obligations. (Source: “Green Plains Partners Reports Fourth Quarter and Full Year 2018 Financial Results,” GlobeNewsWire, February 11, 2019.)
In full-year 2018, Green Plains Partners LP’s distributable cash flow totaled $58.5 million. Its cash distributions, on the other hand, totaled $57.8 million. That allowed the partnership to achieve a distribution coverage ratio of 1.01 times. So again, GPP managed to outearn its generous distributions.
It’s worth noting that Green Plains Partners is not the average oil-and-gas MLP. Instead, it is in the ethanol business.
Green Plains Partners was created by Green Plains Inc (NASDAQ:GPRE), one of the largest ethanol fuel producers in North America, to provide ethanol and fuel storage and transportation services.
Today, the partnership owns a portfolio of ethanol and fuel storage tanks, terminals, and transportation assets. The neat thing about this business is that Green Plains Partners generates a substantial amount of its cash flow from long-term, fee-based commercial agreements. This allows the partnership to run a relatively predictable business despite the fact that ethanol prices can be very volatile.
In its latest earnings report, GPP’s President and Chief Executive Officer Todd Becker said, “While the current ethanol environment may negatively impact put-through volumes at some of our storage locations, we remain focused on maintaining distributable cash flow per unit.” (Source: Ibid.)
Here’s the bottom line: In today’s market, most double-digit yielders are not the safest bets. But if Green Plains Partners LP can keep covering its payout, its 11.9% yield could be an opportunity for yield hunters.